There's a growing debate about what is put inside your fuel pump. At the heart of the debate is a two-carbon alcohol -- ethanol. This little fuel is creating a huge debate, which has divided the farming industry and raised perennial questions regarding the cancerous influence of special interest on the U.S. federal government.

I. Big Corn Makes Friends

When it comes to corn ethanol the message from Congress is clear: cut down on the ethanol production. But the U.S. Environmental Protection Agency (EPA) is still waffling on whether to keep its strict quotas, or to "temporarily" relax them, after the worst drought in decades hit parts of the U.S.

With the drought hurting corn yields, farmers have been forced to compete with ethanol producers and the food industry for an insufficient supply. Some farmers have, in their desperation, turned to feeding their cows candy, as cast-off bulk sprinkles are cheaper than the traditional corn feed.

The EPA's holds a tight grip on the amount of corn going into ethanol, thanks to its ability to regulate fuel in the U.S. Under The Energy Policy Act of 2005 (often referred to as the Renewable Fuel Standard), which passed under President George W. Bush, fuel blenders are required to incorporate a certain amount of ethanol into gasoline blends at the pump, with the amount being bumped a little bit each year.

The U.S. government mandates ethanol be blended into gasoline, to create artificial demand for corn. [Image Source: Nation Corn Growers Assoc.]

In Congress' case, it appeared to be largely special interests. Senators and representatives from corn farming-heavy districts/states accepted funding from farmers to help them get elected, and in turn pushed for the seemingly illogical ethanol blending requirements, which create artificial demand, driving corn prices up. They also for some time passed billions in subsidies along to big corn farmers.

But the ethanol special interests saw their grasp on Congress weakening last year amid the partisan rancor regarding the budget. In a battle by each side to preserve their special interests, corn found themselves too short on the special interests pecking order to convince Congress at large to continue to vote for bloated subsidies.

But even the EPA -- who seemed firm on its ethanol commitment -- has started to show signs of doubt after an entirely external, non-political influence hit -- the drought. The record drought is essentially forcing the EPA's hand, by creating corn shortages and hence amplifying corn ethanol's already undesirable price effects.

The EPA announced it would make its decision [PDF] about a potential waiver on blending requirements early next month.

Amid a record drought either the quota or jobs will be lost, say many farmers.
[Image Source: AP]

Eight state governors and 200 members of Congress have written a letter (on behalf of the slightly ironically named National Pork Producers Council) to the EPA pleading with it to relax blending rules via a waiver, at least for the rest of the year. Delaware and Maryland's governors write that without a waiver the EPA would be creating "the loss of thousands jobs."

Corn farmers are opposed to the idea, which would reduce the artificial demand that they currently enjoy. The National Corn Growers Association essentially admits that it's acting out of greed, but making the argument that higher revenue from corn farmers stimulates the economy in a trickle-down effect. They point out that corn farmers' revenue rose from $63B USD to $90B USD between 2007 and 2012.

They comment [PDF], "Higher feed prices are only one piece of a complicated economic puzzle... [a waiver would cause] severe harm to the economy."

Big corn argues that its profits are worth more than whatever job savings might be realized by quota cuts. [Image Source: Agriculture.com]

Before the drought corn prices had increased nearly four-fold from 2007 levels. The fuel supply industry was set to (by EPA requirement) deliver 15.2 billion gallons of corn ethanol this year -- up from 5 billion gallons in 2007.

But the payday for big corn may soon be over. After all, the Obama administration has a relatively substantial degree of control over the EPA -- a federal agency -- and it may be wary of refusing the waiver request, lest it trigger the predicted job loss and hurt the President' reelection prospects.

What factors exactly move a market price is, as you point out, very complicated.

But any economist (or first year econ student) can say plainly that if any staple commodity market suddenly has a large portion diverted in to a black hole then that'll exert strong upward pressure on the price. There's no need to amass an army of PhD's and spend a year creating some sensitive, highly complex model that tries to separate all the little factors, because at the heart of the matter it's a very simple problem.

Or, if not for this quota, all else being equal, the price of corn would undoubtedly be lower.

And further, due to the substitution effect we can see, where corn is getting a larger share of acreage, that means a spill-over effect to every other crop that could be grown in the same places. Higher prices across the board, again, all else being equal.

This would normally be a wonkish argument reserved for the papers of trade journals and politicians/technocrats, but this isn't some gadget or cell phone or ball bearings we're talking about. It's food. When we live in a country where we've got people going through hard times and in a world rapidly boosting its demand for food, diverting food for the vanity of burning in a fuel tank when such better options exist strikes everyone thats not a farmer or eco-terrorist as insensitive at best, or unwise..

I know it's in your economic interest, but your NCGA is on the wrong side of the moral and economic argument. A more noble position would be to transition out these ethanol quotas and instead focus your efforts on exporting to China and India, but that's not as easy as the ethanol cash cow, I know.

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